Long-Term Capital Management

Long-Term Capital Management (LTCM) was a famous hedge fund in the 1990s that boasted the best and the brightest financial experts, including on its Board of Directors two Nobel Prize-winners in economics. It exploited emerging capital markets in foreign nations without any regard for the havoc that its speculations caused there.[1] It was headed for bankruptcy in 1998 when a bailout arranged at the highest levels of the Clinton Administration saved it and its partners from ruin. Two years later it shut down.

The most prominent partner of LTCM was the former vice chairman of the Federal Reserve Board, David W. Mullins Jr. Investors in LTCM included Goldman Sachs, the former employer of Clinton Treasury Secretary Robert Rubin, and many top executives at the leading investment banks and foreign banks. LTCM controlled contracts involving $160 billion at its peak, and it placed large short-term bets on securities issued by foreign governments.

Alan Greenspan led a multi-billion-dollar bailout of LTCM when a shift in the markets caused LTCM to head for bankruptcy. Greenspan claimed that "substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own." No one pressed him to back up his far-fetched assertion that it was so necessary for the federal government to protect these well-connected investors. Greenspan testified that it was regrettable that the bailout allowed the LTCM partners to retain a small stake in the reorganized fund, yet that was done anyway.

Bailout

When Greenspan authorized the intervention by the Federal Reserve, there was a pending private offer that was less favorable to the privileged investors in LTCM. This private offer would have fully protected against any financial impact on the markets, but it would not have protected the investors. They succeeded in having Greenspan and the Federal Reserve intervene for them.

Specifically, the Federal Reserve Bank of New York provided terms far more advantageous to the LCTM management, at the expense of American taxpayers. LTCM's personal investors received $405 million for their interests, which was $155 million more than the private offer, plus a guarantee that an additional $3.65 billion would remain in LTCM for three years. This sweetheart deal enabled the discredited management to remain in place indefinitely and probably recoup hundreds of millions of dollars. The Federal Reserve claimed that no taxpayer funds were involved in this enormous bailout, but the details were kept secret to prevent verification of that far-fetched claim.

The involvement by Federal Reserve officials plainly did exploit government power, and taxpayers did bear the risk of large losses at the banks used by the Fed to finance the bailout, including the use of guarantees.

Later, Alan "Ace" Greenberg, the 79-year-old chairman of Bear Stearns's executive committee, observed that the public "was told today that Long-Term Capital had America on the precipice, ruined America, ruined the financials," Greenberg said. "Nonsense. It never was even close."[2]